The changing dollar regime: An update
What this covers
Four international economists examine whether the dollar is losing its grip on the global monetary system. Maurice Obstfeld, Joseph Gagnon, and Moritz Schularick—joined by moderator Adam Posen—assess how recent US policy shifts might reshape the architecture of international finance. The panel argues that the dollar's centrality faces genuine erosion, driven not by economic fundamentals alone but by threats to the institutional pillars that have long anchored its dominance: the rule of law, multilateral commitment, fiscal credibility, and monetary stability. Rather than a sudden collapse, the concern is a slow de-centering, where the world moves toward a multipolar currency arrangement.
The discussion spans several distinct terrains. The speakers parse the mechanics of the dollar's actual decline: its share of global reserves has fallen from roughly 70 percent to 58 percent since 2000, though the euro captured little of that loss—the gains went to gold and non-traditional currencies instead. Gagnon unpacks the puzzle of US debt sustainability and the so-called exorbitant privilege, showing how tariffs interact with currency movements and trade deficits in ways that may defy simpler economic models. Schularick identifies the euro's chief constraint: a structural shortage of safe assets that no single European nation can supply. He sketches how a joint European defense bond could close that gap and attract the kind of scale investors demand. Obstfeld raises stakes by contending that current US policy—driven by what he calls a grievance narrative about unfair trade and global arrangements—threatens the very credibility that makes dollar supremacy valuable, while also detailing risks from unregulated dollar-pegged stablecoins that could fragment rather than integrate the world payment system. The analysis turns contentious around causation and forecasts, with the speakers disagreeing on how much the trade deficit reflects structural imbalance versus the dollar's continued appeal to foreign investors.
A panel of international economists argues that the dollar's centrality is gradually eroding ('de-centering') because the institutional pillars underpinning it are under threat from current US policy, while the euro remains a distant second held back chiefly by a scarcity of safe assets that joint debt issuance could remedy.
- US institutional anchors (rule of law, multilateralism, fiscal/monetary credibility) that underpin the dollar are simultaneously under threat from a grievance-driven policy agenda
- The dollar's reserve share has fallen from ~70% to ~58% but the gain accrued to gold and non-traditional currencies, not the euro
- The euro's main drawback is a shortage of safe assets, which a 'team Europe' joint defense bond could address while capturing convenience yield
This asset isn't compiled yet
You're seeing its claims, ranked. Compile it to build the argument threads, weight them, and check each claim against your library — the full view.
The most important drawback holding the euro back as a global currency is the scarcity of safe assets: the US supplies about 30% of world GDP in safe assets, while Germany alone is far below that, the core safe euro-zone countries together reach maybe 5% of global GDP, and including France brings it to about 10% — leaving a huge gap.
“the lack and scarcity of safe assets... the US supplies about 30% of world GDP in and safe assets right now... If you add in the other safe countries in the Euro zone... you get to maybe 5% of global GDP. If you add in France... then we're at 10%. But there's a huge gap”
The dollar's share of global FX reserves declined from about 70% at the turn of the millennium to about 58% now, but the dollar's loss was not the euro's gain — the euro held stable around 20% while non-traditional reserve currencies and gold absorbed the shift.
“it goes down on the right hand scale from about 70% at the turn of the millennium to now 58%... the euro the blue line is very stable... about 20%... the dollar's loss if you will was not the euro's gain”
Rather than the US net debt threatening the dollar's role, it is the dollar's global role that has driven the deficit: US financial assets — treasuries plus private securitized assets — are uniquely attractive due to the economy's size, perceived military and legal safety, and the creativity of US financial markets, which sustains the dollar's reserve role and skews the trade deficit toward the US.
“we think it's the dollar's global role that has basically driven this process... US financial assets are uh, uniquely attractive to international investors... The very large size of the US economy, the perceived safety both military and legal... and creativity of US financial markets that are able to securitize productive assets”
The 'exorbitant privilege' — the US paying a lower return on its borrowing than it earns on its lending — is not unique to the US but shared by most advanced economies, while developing economies have the reverse; if the US retains this privilege, stabilizing its net liability/GDP ratio requires the goods-and-services deficit to shrink by 2% of GDP (implying a 15-20% real depreciation), but if it loses the privilege the deficit must shrink 3.5% of GDP (implying a 25-30% real depreciation).
“the exorbitant privilege... we define as the fact that the US pays a lower rate of return on its borrowing than it earns on its lending... If we retain that uh uh privilege then the trade part... has to shrink by 2% of GDP and that would require... a real depreciation of 15 to 20%... if it loses that exorbitant privilege... that would require a real dollar depreciation of 25 to 30%”
There is a deep paradox in Franco-German fiscal politics: Germany is fiscally hawkish but nation-state dovish (willing to give up sovereignty toward political union, given its post-1945 DNA and need for a taxation power), while France is fiscally dovish but nation-state hawkish (unwilling to sign the political-union 'marriage contract'); a genuine French crisis requiring euro-zone fiscal support could push toward deeper integration.
“Germany is basically fiscally hawkish but if you will nation state doubbish Germany would go the next step towards more political union... France is fiscally dovish and nation state hawkish. So France is ultimately not willing to sign that marriage contract... If that crisis in France leads to the point where France really needs that fiscal support from Europe, I could see... a push towards more integration”
Basic economic theory implies a 10% broad tariff should push the dollar up about 5%, offsetting the tariff's effect on import costs and equally reducing both exports and imports, leaving the trade deficit unchanged in that simple framework.
“a 10% broad tariff should push the dollar up about 5%... the dollar appreciation would offset some of the effect of the tariff on the cost of imports... both exports and imports would go down equally and there'd be no effect on the trade deficit in that basic theory.”
Invoking Alexander Hamilton's principle that good government credit is essential to national strength ('states like individuals who observe their engagements are respected and trusted'), Obstfeld argues that if the US does not change course, dollar supremacy will erode — slowly and then quickly — moving the world toward a multipolar currency system.
“if we don't have a course change the dollar supremacy will erode it will become desentered in the term Adam used slowly and maybe then quickly and we'll move to a multipolar system”
Foreign willingness to buy US treasuries has fallen in relative terms — from about 50% of treasuries sold to the global market around 2010 to roughly a third now — and combined with an investment boom and low US saving, this makes financing the deficit expensive, with average treasury yields having risen sharply.
“Then 50% of treasuries were sold to the global market. Now it's more like a third of treasuries. And with an investment boom going on with low US saving um with low foreign participation uh financing this is going to be expensive.”
The Treasury has been lowering the duration of its debt issuance, which raises the risk of a rollover crisis as more debt must be refinanced frequently at potentially adverse rates.
“the Treasury is currently and has been uh even under the last administration lowering duration raising the risk of um uh rollover crisis.”
Gold has become the go-to diversification asset for official reserve holders, with about 20% of official reserves now held in gold; scaling everything down, dollars are now less than half of reserves with about 16-17% in euros.
“About 20% again of of uh reserves of official reserves are held in in gold... gold has been the uh sort of go-to place for at least for official holders of of uh of reserves um moving diversifying out the dollar”
The US current account has been in deficit continuously for over 40 years, with net liabilities to the rest of the world reported at 90% of US GDP at end of last year (perhaps ~67% adjusted for measurement issues); no single country in human history has ever borrowed so much as a share of the world economy.
“The accumulated uh debt net liabilities uh were reported at 90% of US GDP at the end of last year... maybe the true net number is more like 67% GDP... no single country has ever borrowed so much as a share of the world economy.”
Because about 80% of US bond and bank-loan claims on foreigners are in dollars, the exorbitant privilege is largely driven by the spread between what the US charges foreign dollar borrowers and what it pays on dollar liabilities (tied to treasury spreads); those spreads are now at their lowest in over 25 years, with a risk of going lower that would reduce the privilege.
“the vast majority of US bond and loan bank loan holdings claims on foreigners uh are in dollars about 80%... what really drives uh that part of the exorbitant privilege is the spread between uh what we can charge foreign dollar borrowers and what we pay uh on our dollar liabilities... we are now if you squint hard enough at the lowest level in over 25 years”
If all the factors (large fiscal deficit, AI investment boom, clean household balance sheets) were truly pushing up the trade deficit, the dollar should be stronger; since markets are not pricing that, the trade deficit cannot widen unless the dollar rises — the saving-investment imbalance reconciles with a depreciated dollar through inflation and timing rather than being a genuine conundrum.
“if all this were expected to be pushing up the trade deficit, the dollar should be stronger. So, markets are not seeing it. Uh and unless the dollar goes up, I don't think the trade deficit can widen.”
Europe's joint debt faces a Hamiltonian obstacle: whereas Hamilton justified federal assumption of state debts by creating a federal taxation power to service them, issuing large joint European debt lacks a clear corresponding taxation power, creating reluctance because the institutional framework for paying the debt is not clear.
“his scheme was that the federal government would assume the debts of the various states and it was a way of actually justifying a federal taxation power to service those. And um Europe kind of has the adverse problem that if you issue all this joint debt... where is the taxation power that that um uh covers it?”
US-based stablecoin companies would be a tempting mechanism for sanctions on other countries, and stablecoins raise concerns abroad about financial stability, dollarization, and AML/CFT, likely provoking pushback — while a trillion-plus dollars of physical cash abroad may migrate into stablecoins as a more efficient way to do undetected transactions, with unclear net effect on dollar strength.
“US-based stable coin companies would be a very um tempting mechanism for sanctions on on other other countries. I think there's a lot of concern in the rest of the world about financial stability about uh dollarization... there are about a trillion uh uh uh dollars in um uh dollar bills out there... that migrate into the stable coin system”
The Genius Act sets the stage for a proliferation of lightly regulated dollar-pegged stablecoins from the US, which could spark defensive reactions in countries fearing for their financial stability or monetary sovereignty, ultimately acting as a mechanism for fragmentation rather than integration of the world payment system.
“the Genius Act is setting the stage for a proliferation of lightly regulated stable coins uh pegged to the dollar coming from the US... I think ultimately these are a mechanism for fragmentation rather than integration of the world payment system.”
Large investors would welcome a big, liquid pool of joint euro debt because it lets them move in and out in size without moving the market, unlike fragmented national markets (German Bunds vs Italian bonds) where size constraints bite.
“I sense a great openness and uh support for joint debt issuance... they're not attracted by figuring out how much can I buy of buns and how much can I buy of Italian without moving the market. So the idea of having a large joint uh pool of debt that is liquid and where you can move in and and size in and out in size is something that I think markets would welcome.”
The concern is not that the dollar will collapse in a crisis, but that the centrality of the dollar — and the benefits to the US and world economy of having a strong central currency and insurance provider — is being eroded and somewhat replaced ('de-centering').
“it's not that the dollar is going to fall some huge amount the dollar's in crisis. but that the centrality of the dollar and the many important benefits for both the US and the world economy that went with having a strong central currency”
Administration policies threaten to undermine US global hard and soft power as much as they might be designed to do the opposite, fragmenting not only trade markets but potentially financial markets too, via coercive tariffs, retreat from regulatory cooperation, risk of capital controls, lightly regulated dollar stablecoins, and withdrawal from providing global public goods.
“the administration's policies are threatening to undermine US global power as much as they might be uh designed to do the opposite. Hard power and soft power... not only are trade markets being fragmented, financial markets may be uh on the way to that fate as well.”
The institutional pillars underpinning the dollar's global role — deep and open financial/product markets, commitment to multilateralism and security credibility, strong monetary and fiscal frameworks, limited government intervention, and the rule of law — are all under threat in the current US political environment.
“deep and open financial and product markets. Commitment to multilateralism including credibility in the security sphere... strong monetary and fiscal frameworks... a commitment to limited government intervention... And finally the rule of law. All of these underpin the dollar's central role... they're all under threat in the current political environment in the US.”
Customs duties have quadrupled this year but, as of August, were only about 8 percentage points of goods imports higher — roughly half of estimates like Chad Bown's 21pp, CBO's 18pp, or Yale Budget Lab's 15pp — suggesting either loopholes/exemptions, evasion, or more increases to come.
“customs duties although they're rising rapidly have quadrupled this year, they haven't risen as much as you might have expected... as of August uh they were only uh eight percentage points of goods imports higher. So uh maybe half of what some of these estimates say.”
The euro is a solid but distant second to the dollar, accounting for roughly 20% across most international markets (FX reserves, international debt, loan and deposit markets, FX turnover), while the dollar denominates about 54% of global equity market capitalization with about 10% of that foreign-owned.
“the euro is a solid second... it accounts for roughly about 20% of uh across most of these uh markets... 54% of global equity market capitalization is in is in in in denominated in in dollars but about 10% of this is now foreignowned.”
The attack on Fed independence, usually framed around monetary policy and inflation, also extends to financial regulatory matters and international financial cooperation; reduced coordination through the Basel process and FSB will end up fragmenting financial markets.
“the attack on Fed independence which we usually think about in terms of uh monetary policy and inflation certainly also extends to financial regulatory matters and to international financial cooperation... less um coordination among global regulators through the Basel process, through the FSB, uh that's going to end up fragmenting fragmenting financial markets.”
US policy is being driven by a 'grievance narrative' — that trade has been unfair and caused deficits and manufacturing decline, that global capital markets and even dollar primacy work against US interest, and that foreign security commitments are unfair burdens — and the resulting zero-sum approach plus routine use of tariffs for geopolitical coercion is genuinely new in the post-war period.
“US policy is being driven by a grievance narrative. Uh it's a narrative that trade has been unfair uh to the US... the current US zero someum approach to redressing them uh is very new and so is the routine use of tariffs for geopolitical coercion”
There was a massive amount of currency manipulation in 2003-2013 (now persisting at a much lower level) that, because the dollar is the main currency it flows into, tends to skew the trade deficit toward the US.
“the work I did with Fred Bergston a few years ago uh showed that uh there was a massive amount of what we call currency manipulation in the decade 2003 to13. it persists at a much lower level to this day and the dollar is the main uh uh currency... which means that it tends to skew the trade deficit to the US.”
Despite the political changes of the past year, there has been no significant decline in European portfolio inflows to the US; with the stock market boom, European equity investors have kept investing in the US, and euro-area inflows into US treasuries show no clear downward trend.
“in terms of of portfolio inflows to the US there is no significant uh decline if anything uh with the stock market boom uh European uh equity investors have been keen to continue to invest in the US”
The euro could simultaneously address its two key gaps — scarce safe assets and weak geopolitical/security posture — by issuing joint 'team Europe' defense bonds: a variable-geometry coalition (possibly including the UK) issuing future-of-defense bonds to finance strategic dual-use enablers (AI, space, missile shield), achieving sovereign benchmark status and capturing convenience yield such that it could be nearly self-financing.
“two of these um two of these gaps in the euro's posture... namely the lack of supply of safe assets and sort of the geopolitical security dimension could be tackled jointly by creating uh safe assets as European joint defense debt of we call it team Europe... If that's happening and the the Euro convenience yield... this could almost be self- financing”
Under heroic assumptions, a 15pp tariff increase with the dollar at current levels would shrink the goods-and-services trade deficit by $300-400 billion (about 1% of GDP), but since the current account deficit is 4% of GDP, this is a material change rather than elimination — and the effect on the current account may be even smaller because the investment income deficit is likely to widen.
“you would expect the trade deficit to shrink this is the goods and services trade deficit to shrink by 3 to400 billion dollars which is about 1% of GDP however we saw earlier that the the broadest measure... the current account balance is 4% of GDP so this is not getting rid of our trade deficit but it is a material uh change.”
When the US president argues interest rates need to be lower, the recurring theme is financing the deficit at lower cost, signaling a real risk that the US moves toward fiscal dominance — where monetary policy is subordinated to fiscal financing needs.
“When um the president talks about why interest rates need to be lower in the US, often the theme is that uh it's about... financing the deficit at lower at lower cost. Um so there's a general assault on norms”
The house version of the One Big Beautiful Bill included a 'revenge tax' on foreign investors' US profits which, though dropped after outcry, signals greater US openness to using financial instruments to tax cross-border financial flows.
“the um first version of the one big beautiful bill, the h the house version of that um included the so-called revenge tax... taxing uh foreign profits of investors in the US. There's a great outcry. It didn't come to fruition, but it indicates the great the greater openness to using um financial instruments to tax uh financial flows across across the border.”
The US faces a difficult fiscal trajectory: roughly $4 trillion more borrowing over a 10-year horizon than the start-of-year baseline due to the One Big Beautiful Bill Act, with tariff revenues likely covering less than half of that, leaving a large financing hole.
“probably we're looking at over a 10-year horizon uh uh $4 trillion more of borrowing than was true at the beginning of the year baseline uh due to the one big beautiful bill act. Uh tariff revenues are substantial but... probably are unlikely to cover uh more than half half of that. So that's a big hole.”
Issuing 1% of GDP per year for ten years would leave roughly 10% of GDP outstanding — adding €1.5 to €2 trillion over the decade to both European defense capabilities and the depth of European financial markets.
“if you issue 1% of GDP for 10 for each for each of the next 10 years we have roughly 10% of GDP outstanding uh that adds one and a half trillion or even more two trillion over the next decade not only to European defense capabilities and and spending but also to the depth of uh European financial markets.”
The dollar appreciated ~5% in real broad terms from October 2024 to January 2025 (consistent with markets pricing a 10% tariff), but from late January it gave up all those gains and returned to the starting point; Gagnon interprets this reversal as foreign investors recoiling from erratic policies, out-of-control fiscal policy, and anti-foreigner grievance rhetoric.
“the dollar did appreciate in real broad terms 5%... However, something changed starting in late in the end of January. Basically the dollar has given up all those gains... if I was a foreign investor would I really want my money in a country that blamed people like me for its problems”
Investors no longer worry about Greek-style fiscal sustainability in the euro zone to the extent they used to, because it has become 'a contest of ugliness' — many countries are now in fiscally weak positions, so peripheral euro-zone members no longer look so bad by comparison.
“I don't in my conversations hear people worrying about Greece or fiscal sustainability to the same extent that they used to I guess because it's now a contest of ugliness and many countries are fiscally in in a Greek position so to say in the old... position right now they don't look so bad actually”
Germany's March change to the debt brake relieved financing constraints and made debt issuance possible for defense and (for some time) infrastructure, but the appetite to take the next step toward European joint issuance and integration remains limited.
“the change in the debt break that we've had in March has relief financing constraints debt issuance now is possible for defense and uh at least for some time for infrastructure projects... the appetite to go the next step in terms of European joint issuance integration is I think right now unfortunately still limited.”
National defense is the natural way into European joint debt issuance, because it provides a shared rationale that overcomes the usual reluctance toward mutualized debt.
“Jacob Kirkagard and I did a report... in which we talked about the idea that national defense would be the way into joint issuance. And again this the the the logic is there.”
The renminbi accounts for only about 2% of global FX reserves and has not been increasing over the last five years, so it is not a significant player in reserve diversification.
“the renmanb on the... about 2% of glo foreign exchange reserves is not a big player and has also not uh uh been increasing at least not in the last five years”
Manufacturing employment showed a recovery starting at the end of 2024 but has since reversed and is now falling, so if the policy goal was to restore manufacturing employment, it is not yet being achieved.
“we did see something of a uh recovery here uh starting at the end of 2024 and uh this is come to an end and reversed uh uh with manufacturing employment falling. So if the goal was to restore this we're not we're not seeing it yet.”
Concerns over the US balance of payments are not new and go back to the 1960s.
“concerns over the US balance of payments go back to the 1960s uh uh of course”